Bus operator Stagecoach [SGC] is set to delist from the London Stock Exchange by the end of June following its recent £600m acquisition by European infrastructure fund Inframobility UK.
The deal was agreed in March and saw Inframobility – which is owned by Infrastructure III, which in turn is managed and advised by infrastructure investment manager DWS Infrastructure [DWS] – beat off the £445m offer from transport rival National Express [NEX].
Stagecoach shares surge amid positive outlook
The Stagecoach share price has risen since the agreement, increasing from 75.45p in early March to 104.7p by the close on 24 June. In contrast, the DWS share price has fallen from around €30 in early March to €26, as of the close on 24 June.
This decline has been attributed to a recent German police raid on DWS’s Frankfurt office over claims of ‘greenwashing’ – or misleading investors on its sustainability efforts – at the firm. It triggered the resignation of CEO Asoka Wöhrmann, who was replaced by Stefan Hoops, the current head of Deutsche Bank’s Corporate Bank. Deutsche Bank is the majority owner of DWS.
Despite the unrest at DWS, there is more confidence about the future direction of Stagecoach under its ownership, particularly as increasingly environment-conscious populations switch to public transport. This may be part of the reason why Stagecoach and other operators such as FirstGroup [FGP] and Go-Ahead [GOG] have attracted takeover interest from international buyers.
UK ‘bus revolution’ boosts demand
In 2021, the UK government launched a £3bn ‘bus revolution’ strategy, including plans to introduce simpler bus fares with daily price caps, more evening and weekend services, contactless payments and 4,000 new UK-built electric or hydrogen buses.
“The 2020s will be the golden age of electric buses,” said Hamish Mackenzie, head of infrastructure at DWS Group.
Stagecoach is already seeing benefits with strong half-year results. It reported revenues of £579.4m, up 27% on the same period in 2021. Pre-tax profits came in at £31.1m, compared with £5.4m last year. UK bus revenue was up 34.7% year-on-year at £438m, while UK rail revenue grew 92.9% to £5.4m.
The company’s report said that the lifting of pandemic restrictions helped demand to recover, though it was still below 2019 pre-pandemic levels. It highlighted uncertainty around the trajectory of the Covid-19 recovery and issues with driver shortages and “lost mileage”.
However, Stagecoach stressed that the long-term outlook was generally positive. “Greener and smarter public transport is central to delivering government ambitions around decarbonisation, levelling up of communities, driving economic recovery and securing better health outcomes for citizens,” CEO Martin Griffiths said.
Since those results and the DWS deal, Stagecoach has acquired Australia-headquartered Kelsian Group’s east London bus operations for £20m.
Stagecoach, which has pledged to achieve a 100% zero-emission UK bus fleet by 2035, revealed in its ‘Road Map to Zero’ report that more than one million new passengers could be attracted to use the UK’s bus networks through the switch to cleaner, greener buses.
Analysts are bullish on Stagecoach
According to MarketScreener, five analysts covering Stagecoach gave the stock a consensus ‘outperform’ rating and an average price target of 110p, representing a 5% upside on its 24 June closing price.
“The favourable policy environment, including increasingly a bus-friendly UK, is clearly an attraction for long-term investors,” said RBC Capital analyst Ruairi Cullinane.
Moody’s has also recently changed its rating outlook on Stagecoach to ‘stable’ from ‘under review for downgrade’.
It believes that Stagecoach operations will continue to recover from the pandemic, leading to revenues and EBIT growth. Stagecoach reported that in February 2022 its passenger journeys were back at 70-78% of pre-pandemic levels, and Moody’s believes this will grow to around 90% over the next two years.
In a research note on 24 June, Moody’s said Stagecoach is likely to be “insulated from rising fuel prices thanks to its hedging book, although potential exists for cost inflation, especially around wages”.
It added: “The company is also facing broader issues of full recovery from the pandemic, including greater prevalence of working from home. Still, it benefits from being a more cost-efficient mode of transportation [which is] particularly advantageous in the current environment.”
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